How to Invest in Junior Mining stocks

Here at FTSEAIM.CO.UK, we have an investing thesis: that there are huge supply gaps, especially for the west, when it comes to critical minerals including lithium, copper, graphite, nickel, REEs et al. 

The basic argument is that anticipated future demand — as green energy and the rEVolution accelerate — for these minerals will vastly increase, while legacy supplies continue to degrade and the industry refuses to invest in exploration.

If you consider the economic data coming out of China, which controls most of the global production and processing (and also uses up much of these minerals domestically), it’s not looking good. There is little short-term incentive for capital expenditure at the likes of Glencore or Rio Tinto, especially at the junior resource level, as investors in the majors prefer the dividend income instead.

But over the longer-term, the juniors with quality deposits will be in the driving seat in future negotiations. Our view is that this is inevitable.

Beyond this, we are also relatively confident that the bottom is now in (or very close) for the junior resource space, which has suffered through a fairly harsh few years.

This is not financial advice.

1. Educate Yourself — before investing in any sector, including mining, it’s crucial to educate yourself about the industry, the commodities being mined (e.g., gold, lithium, copper, etc), the companies involved, market trends, and geopolitical factors that can affect mining operations and commodity prices. This is a learning process that never ends, but the best day to start is today.
2. Research Mining Companies — research possible mining investments to understand their financial health, project development stage, management team experience, and overall business strategy. Look for companies with a strong management team and promising mining asset(s). My personal view is that you need to have faith in the CEO — and many are ‘characters’ to say the least. An important part of research is to source viewpoints from at least three sources; my interpretation of an RNS may be very different to another analyst’s, and the more perspectives you get the better.
3. Commodity Analysis — analyse the commodities the mining company is involved in. Commodity prices can significantly impact the profitability of mining operations. Understand the supply-demand dynamics and factors influencing prices — lithium’s price will likely rise over time, while tin will probably be very volatile, and iron less so.
4. Financial Analysis — examine the financial statements of mining companies. Look at key financial ratios such as its debt-to-equity ratio, cash flow, and profitability margins. A financially stable company is better positioned to weather market fluctuations. With small caps, it’s important to try to figure out how a company plans to bring an asset to production. There is no one right way to do this, but popular choices are share placings, alongside offtake or JV partners. Each has their own merits and downsides.
5. Assess Risks — mining stocks are subject to a variety of risks, including commodity price volatility, geopolitical instability, regulatory changes, environmental concerns, and operational challenges. Volatility is a given in the small-cap space, and it’s not uncommon to see daily 10% swings with large spreads at the close.
6. Diversification — while we cannot give advice, putting all your capital into a single mining stock might not be the best idea. Diversify your portfolio across multiple mining companies and potentially across different commodities and geographies to spread risk.
7. Long-Term Perspective — mining investments can be cyclical, subject to short-term volatility, and take years to get to profitability. Consider a long-term investment perspective to potentially benefit from the company’s long-term prospects and try to ignore the short-lived dips and spikes. If you can’t help but sell at 20% up or down, you will likely lose money over the long term.
8. Stay Informed — easy for professionals who do this all day, but you need to keep up with industry news, market trends, and any developments related to the mining companies you’re invested in. While we subscribe to a long-term investing philosophy, a material change such as a CEO exit or poor drilling result can make it worth considering making an exit.
9. Stay Unemotional — this is harder than it sounds. When you invest in a mining company’s journey, it can be hard to let go if it doesn’t end up well. Investing in early-stage companies does require conviction, but it’s also important to accept when you have made a mistake and get out with at least some of your capital.
10. Choose a Brokerage Account: Open a brokerage account that allows you to buy and sell mining stocks. Ensure the brokerage platform provides the necessary research tools and resources for analysing mining companies.

One of the most important factors to keep in mind is that many exploratory mining companies fail. From concept, to scoping, to pre-discovery, to pre-feasibility, to feasibility studies, to development, through the orphan period, into operation — there’s a thousand things that can go wrong (and that’s in a Tier-1 jurisdiction).

You are trying to pick winners in a sea of losers; but if you get it right, then the rewards are far greater than in almost any other sector.